Answer the following question(s)using the information below:
Greenlawn Ltd.has two divisions, Distribution and Production.The company's primary product is fertilizer.Each division's costs are provided below:
The Distribution Division has been operating at a capacity of 4,000,000 kilograms a week and usually purchases 2,000,000 kilograms from the Production Division and 2,000,000 kilograms from other suppliers at $0.45 per kilogram.
-What is the transfer price per kilogram from the Production Division to the Distribution Division, assuming the method used to place a value on each kilogram of fertilizer is 120% of full costs?
A)$0.30
B)$0.36
C)$0.45
D)$0.55
E)$0.42

Question

Answer the following question(s)using the information below:
Greenlawn Ltd.has two divisions, Distribution and Production.The company's primary product is fertilizer.Each division's costs are provided below:
  The Distribution Division has been operating at a capacity of 4,000,000 kilograms a week and usually purchases 2,000,000 kilograms from the Production Division and 2,000,000 kilograms from other suppliers at $0.45 per kilogram.
-What is the transfer price per kilogram from the Production Division to the Distribution Division, assuming the method used to place a value on each kilogram of fertilizer is 120% of full costs?
A)$0.30 
B)$0.36 
C)$0.45 
D)$0.55 
E)$0.42

Quizplus · Accepted Answer

Since the method used to place a value on each kilogram of fertilizer is 120% of full costs and the Distribution Division purchases 2,000,000 kilograms from the Production Division, the total cost incurred by the Production Division is:
$0.20 + $0.18 + $0.10 = $0.48 per kilogram
120% of $0.48 = $0.58 per kilogram
Therefore, the transfer price per kilogram from the Production Division to the Distribution Division is:
$0.58 x 2,000,000 kilograms = $1,160,000
And since the Distribution Division usually purchases 2,000,000 kilograms from the Production Division, the transfer price per kilogram is:
$1,160,000 ÷ 2,000,000 kilograms = $0.58 per kilogram
However, since the Distribution Division usually purchases the other 2,000,000 kilograms from other suppliers at $0.45 per kilogram, it would not make sense for them to purchase from the Production Division at a higher price. Thus, the maximum transfer price that the Distribution Division would be willing to pay is $0.45 per kilogram. Therefore, the best choice is B ($0.36 is 120% of $0.30, which is the Production Division's full cost per kilogram).

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